Twenty-First Century Fox 2005 Annual Report Download - page 44

NEWS CORPORATION
The television broadcast environment is highly competitive. The primary methods of competition in broadcast television are the development
and acquisition of popular programming and the development of audience interest through programming promotion, in order to sell advertising at
profitable rates. FOX competes for audience, advertising revenues and programming with other broadcast networks such as CBS, ABC, NBC,
UPN and the WB, independent television stations, cable program services as well as other media, including DBS television services, DVDs, print
and the Internet. In addition, FOX competes with the other broadcast networks to secure affiliations with independently owned television stations
in markets across the country.
The television stations owned and operated by the Company compete for programming, audiences and advertising revenues with other
television stations and cable networks in their respective coverage areas and, in some cases, with respect to programming, with other station
groups, and in the case of advertising revenues, with other local and national media. The competitive position of the television stations owned by
the Company is largely influenced by the strength of FOX, and, in particular, the primetime viewership of FOX, as well as the quality of the
syndicated programs and local news programs in time periods not programmed by FOX.
In 2002, Nielsen Media Research (“Nielsen”) began to transition the existing local television ratings system to the use of Local People
Meters (“LPMs”) in certain large markets. The transition to LPMs has adversely impacted the ratings of the television stations owned by the
Company in the markets where the transition has occurred. In the fourth quarter of fiscal 2005, Nielsen introduced LPMs in the Philadelphia and
Washington D.C. markets. In fiscal 2006, Nielsen plans to introduce LPMs in the Dallas and Detroit markets.
Newer technologies, including video on demand, personal video recorders and other devices that allow users to view television or motion
pictures from a remote location or on a time-delayed basis, and technologies which implement the ability for users to fast-forward, rewind, pause
and skip programming may cause changes in consumer behavior that could affect the attractiveness of the Company’s offerings to viewers,
advertisers and/or distributors and could, therefore, have an adverse effect on the Company’s businesses, particularly its Television and Cable
Network Programming businesses.
Generally, the Company’s cable networks, which target various demographics, derive a majority of their revenues from monthly affiliate fees
received from cable television systems and DBS operators based on the number of its subscribers, net of the amortization of cable distribution
investments (capitalized fees paid to a cable operator or DBS operator to facilitate the launch of a cable network). Cable television and DBS are
currently the predominant means of distribution of the Company’s program services in the United States. Internationally, distribution technology
varies region by region.
The Company’s cable networks compete for carriage on cable television systems, DBS operators and other distributors with other program
services, as well as other uses of bandwidth, such as retransmission of free over-the-air broadcast networks, telephony and data transmission. A
primary focus of competition is for distribution of the Company’s cable networks that are not already distributed within a particular cable
television or DBS system. For such program services, distributors make decisions on the use of bandwidth based on various considerations,
including amounts paid by programmers for launches, subscription fees payable by distributors and appeal to the distributors’ subscribers.
FOX is dependent upon the maintenance of affiliation agreements with third party owned television stations, and there can be no assurance
that these affiliation agreements will be renewed in the future on terms acceptable to the Company. The loss of a significant number of these
affiliation arrangements could reduce the distribution of FOX thereby adversely affecting the Company’s ability to sell national advertising time.
Similarly, the Company’s cable networks maintain affiliation and carriage arrangements that enable them to reach a large percentage of cable
television and direct broadcast satellite households across the United States. The loss of a significant number of these arrangements or the loss
of carriage on basic programming tiers could reduce the distribution of the Company’s cable networks, which may also adversely affect such
cable networks’ revenues from subscriber fees and ability to sell national and local advertising time.
In Asia, STAR’s programming is primarily distributed via satellite to local cable operators or other pay TV platform operators for distribution
to their subscribers. STAR derives its revenue from the sale of advertising time as well as affiliate fees from these pay TV platform operators.
The most significant operating expenses of the Television segment and the Cable Network Programming segment are expenses related to
acquiring and producing programming and the production and technical expenses related to operating the technical facilities of the broadcaster
or cable network. Other expenses include promotional expenses related to improving the market visibility and awareness of the broadcaster or
cable network and sales commissions paid to the in-house advertising sales force, as well as salaries, employee benefits, rent and other routine
overhead.
Sports programming rights contracts between the Company, on the one hand, and various professional sports leagues and teams, on the
other, have varying duration and renewal terms. As these contracts expire, the Company may seek renewals on commercial terms; however,
third parties may outbid the current rights holders for such rights contracts. In addition, professional sports leagues or teams may create their
own networks or the renewal costs could substantially exceed the original contract cost. The loss of rights could impact the extent of the sports
coverage offered by FOX and its affiliates, and the Company’s regional sports networks (“RSNs”), and could adversely affect its advertising and
affiliate revenues. Conversely, if the Company is able to renew these contracts, the results could be adversely affected if escalations in sports
programming rights costs are unmatched by increases in advertising rates and, in the case of cable networks, subscriber fees.
The Company has several multi-year sports rights agreements, including contracts with the National Football League (“NFL”) through fiscal
2012, contracts with the National Association of Stock Car Auto Racing (“NASCAR”) for certain races through calendar year 2006 and exclusive
rights for certain ancillary content through calendar year 2012, and a contract with Major League Baseball (“MLB”) through calendar year 2006.
These contracts provide the Company with the broadcast rights to certain national sporting events during their respective terms. In June 2005,
NASCAR exercised an early termination clause in one of its contracts. Prior to the early termination, the Company had the right to broadcast
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